Albarran v Pascoe

Background 7 The Company was incorporated on 30 August 2018. It operated a construction business whose primary project was the construction of a large commercial and residential development at Gosford. At the time of Mr Frisken's purported appointment as voluntary administrator, the Company was no longer carrying on business. 8 On 16 June 2021, Mr Cardinal, in his capacity as the Company's sole director, purported to pass a resolution on behalf of the Company to appoint Mr Frisken as voluntary administrator. Mr Cardinal had earlier caused his solicitor to make an enquiry of Mr Frisken's office as to possibility of appointing Mr Frisken as administrator. Mr Frisken had his staff perform various searches following this enquiry as part of his firm's 'usual due diligence' before accepting an appointment. The searches undertaken included an ASIC search and various searches directed to potential conflicts of interest. Mr Frisken deposes that the searches did not alert him to the possibility that Mr Cardinal had not been validly appointed as a director. Consequently, Mr Frisken accepted the appointment. 9 A search of the National Personal Insolvency Index (NPII) did not form part of the usual due diligence process to which Mr Frisken deposes. I further note in the circumstances of this case, that although there is a lacuna in the evidence, it is unlikely that such a search in the name "Thomas Cardinal" would have uncovered Mr Cardinal's status as an undischarged bankrupt because of his change in name and the absence of his birthdate on the relevant entry on the NPII. 10 Mr Frisken deposes to the various tasks he has undertaken in the administration including meeting with Mr Cardinal on 17 June 2021, receiving a Deed of Company Arrangement (DOCA) proposal from Mr Cardinal on or about 21 June 2021, issuing his main report to creditors on 29 June 2021 and chairing the second meeting of creditors on 7 July 2021. I note in passing that Mr Frisken having considered the DOCA proposal put forward by Mr Cardinal recommended against it at the second meeting of creditors. 11 Mr Frisken was first alerted to the possibility that Mr Cardinal might be an undischarged bankrupt on 23 June 2021. He was informed by one of his employees that the Company's accountant had informed him the previous day that he "had heard rumblings that Peter Zhu might be an undischarged bankrupt". 12 In response to this information, Mr Frisken and his staff undertook the following steps: (a) At 7:45 pm on 22 June 2021, Mr Frisken's staff searched the ASIC database and extracted an ASIC Personal Name Extract, which is in evidence. (b) On 25 June 2021, Mr Frisken caused an email to be sent to Mr Nelson, the Company's accountant, requesting further information about the 'issue of the undischarged bankruptcy of Mr Tao Zhu' and also sent an email to Mr Cardinal requesting an explanation about the allegation that Mr Cardinal was an undischarged bankrupt. (c) Mr Cardinal provided a response on the same day in which he asserted that he was not aware of any bankruptcy notice. Attached to this email was a change of name certificate showing that Mr Cardinal's former name was Tao Zhu. (d) On 25 June 2021, Mr Frisken caused a search to be performed of the NPII which obtained an entry in the name of Tao Zhu. That entry did not include a birth date for Tao Zhu. 13 Mr Frisken proceeded to convene the second meeting of creditors. He formed the view that it was unlikely that Mr Cardinal was an undischarged bankrupt. He thought that either ASIC or the Official Trustee would have had in place processes to detect any use of aliases and would not permit an undischarged bankrupt to be registered as a director of an Australian corporation. 14 On 7 July 2021, Mr Frisken chaired the second meeting of creditors at which the creditors overwhelmingly supported a resolution that the Company be wound up. There is no evidence that Mr Frisken informed creditors of the potential issue about the validity of his appointment as an administrator at this meeting. 15 The plaintiffs submit, and I accept, that at this time Mr Frisken was operating under the time constraints imposed under the Act in respect of convening the second meeting of creditors and in addition, in the context of an imminent hearing of an application to wind up the Company due to be heard in the Supreme Court of Queensland the next day. Nonetheless, it is regrettable that the potential issue in respect of the validity of his appointment was not flagged to creditors at the second meeting, which was held on 7 July 2021, over a week after Mr Frisken's receipt of the NPII search and the certificate of Mr Cardinal's change of name. It was, if not naïve, then certainly optimistic after receipt of these documents, to rely on Mr Cardinal's assertion that he had not been served with a bankruptcy notice and was not aware of any sequestration order coupled with an asserted belief that ASIC would not have registered Mr Cardinal's appointment as a director if he was a bankrupt given by that time, Mr Frisken knew that Mr Cardinal had changed his name and also used names other than his legal name. As noted above, Mr Frisken has since filing this application squarely raised the issue with creditors with the result that the application has been expressly supported by some creditors and no creditors have communicated any opposition. 16 After the second meeting of creditors, Mr Frisken has availed himself of legal advice about this issue. He gives evidence that in reliance on that advice, he brought this application on 3 August 2021. Mr Frisken has not put the legal advice he has received in evidence.

Legal Principles 17 Section 447A vests the Court with power to make such order as it thinks appropriate about how Part 5.3A of the Act is to operate in relation to a particular company. 18 Section 447A affords the Court 'plenary powers to do whatever it thinks is just in all the circumstances': Cawthorn v Keira Constructions Pty Ltd (1994) 33 NSWLR 607 at 611 (Young J). The discretion afforded by this section is to be exercised in accordance with the objects of Pt 5.3A: Australasian Memory Pty Ltd v Brien [2000] HCA 30; (2000) 200 CLR 270 at 281 - 282 (Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ). 19 The power can be exercised to make an order with future effect in respect of past matters or events including where the order made remedies an irregularity which affects the validity of steps taken by the company and third parties: Australasian Memory at 282-284, [26], [31]-[32]. 20 The power is also exercisable in relation to a company in liquidation which was formerly in administration: Gibbons v LibertyOne Ltd [2002] NSWSC 274; (2002) 167 FLR 310 (Austin J), applied in Re One.Tel Ltd; Walker and Sherman (as liqs) [2002] NSWSC 1081; (2002) 43 ACSR 305 (Wilcox, von Doussa, Finkelstein JJ), Re Love [No 1] [2003] NSWSC 58; (2003) 44 ACSR 367 (Barrett J), Re Centaur Mining & Exploration Ltd (in liq) [2003] FCA 1339; (2003) 133 FCR 482 (Merkel J), Re MF Global Australia Ltd (in liq) [2013] NSWSC 779 (Garling J), and Quinlan; Re Halifax Investment Services Pty Ltd (admins apptd) (No 4) [2019] FCA 604 (Gleeson J).

Regularising invalid appointments 21 The power under s 447A has been exercised in several instances to validate an administrator's invalid appointment. One such example is in Re Wood Parsons Pty Ltd (in liq) [2002] NSWSC 1058; (2002) 43 ACSR 257, the persons purporting to act as directors and, as such, appoint administrators, in that case had not been validly appointed as directors for lack of a quorum of shareholders. Austin J held (at [46]) that the power conferred by section 447A could be exercised in relation to a company in liquidation to cure an invalid appointment of administrators and validate their conduct. 22 The power is discretionary. In Re Australian Art Investment Pty Ltd [2012] VSC 18, Davies J held (at [6]) (omitting references): The focus of the court when making an order under s 447A is the position of the company at the time of making the order and what is best for the company in the future. The exercise of discretion should be exercised however having regard to all those who have an interest in the matter and would be affected by the granting of relief. One relevant consideration is whether substantial injustice would be caused by validating an otherwise invalid appointment. 23 In Hayes v Doran (No 2) [2012] WASC 486, Kenneth Martin J (at [279]) listed a number of considerations that courts have taken into account in deciding whether to exercise this discretion in favour of validating an appointment (omitting citations): a. the likely insolvency of a company; b. whether the administrator made inquiries to confirm the validity of his appointment including seeking external legal advice; c. whether it would be potentially disruptive to the affairs of the company for there to be the capacity to challenge the validity of what has occurred in the administration to date; d. whether it would be wrong to give the imprimatur of the court to the conduct giving rise to the purported appointment; e. the fact that the administrator had carried out substantial work and incurred costs in the not unreasonable belief at the time that his appointment as administrator was valid; f. the effect of an order on the administrator's entitlement to a statutory indemnity and remuneration and the consequences of a change in the relation-back date; g. whether any creditor opposes the application; h. whether a creditor challenging the validity of the appointment promptly pursued that challenge. There is an inconsistency with the purposes of Part 5.3A for creditors to delay challenging the validity of an administrator's appointment until after he or she had completed his work and steps had been taken on the basis that the administrators and the DOCA were valid; i. the acquiescence of the persons who challenged the DOCA in the administration; j. whether any person would be subject to any particular prejudice by the validation of the appointment; k. whether the directors of the company can work together in the future; and l. the stage of the administration, the financial position of the company, whether the business could continue if it was returned to the control of the directors and whether there are any better options available to deal with the company's future. 24 The court has exercised the power to cure invalid appointments arising due to a director being an undischarged bankrupt: see for example Albarran v Pascoe [2006] NSWSC 418; (2006) 232 ALR 810 (Austin J), Sule Arnautovic and John Kukulovski [2009] NSWSC 1444 (Hammerschlag J), and Calabretta v Redpen Developments Pty Ltd (in liq) [2010] FCA 81; (2010) 183 FCR 47 (Yates J).

Consideration 25 In this case, Mr Frisken and the Company have standing to make this application pursuant to s 447A(4)(a) and (c) of the Act. 26 The first consideration is directed towards what is in the best interest for the Company in the future: Re Australian Art Investment at [6]. None of the Company's creditors have expressed any opposition to the liquidation, and four creditors have recently indicated that they support the application to regularise Mr Frisken's appointment. Whilst not determinative of this question, there is force in the view expressed by Brereton J (as his Honour then was) in In the matter of SFL/PILTECH (EA) Pty Ltd [2018] NSWSC 637 at [14] that creditors are the best judges of their own interests when having regard to an insolvent company's future. His Honour's comments were made in a different context but are apt in the present circumstances. 27 On the evidence I am satisfied that the Company is in all likelihood insolvent and unable to return to a position of viability for the reasons disclosed in Mr Frisken's report to creditors of 29 June 2021. Further, the Company was not trading at the time of Mr Frisken's purported appointment, and could not therefore continue its business if it were returned to the position it was in prior to the administration. 28 I am satisfied that considerable disruption is likely to be caused to the affairs of the Company if Mr Frisken's appointment is not regularised. In any event it is clear that Mr Cardinal as an undischarged bankrupt is disqualified and cannot be restored to his position as sole director of the Company. There is, on the evidence, no plausible candidate to manage the Company's affairs if Mr Frisken's appointment is not validated. The appointment of an alternate form of control, whether that be a receiver, trustee or another liquidator would necessitate duplication and further costs to the Company which would not be justified in the circumstances. 29 Mr Frisken has carried out the work he has undertaken since his appointment in the bona fide belief that his appointment was valid. If his appointment is not regularised, he would be deprived of the statutory indemnities which protect administrators and liquidators. Similarly, Mr Frisken would be deprived of his remuneration for both the administration and the liquidation, which were approved by the Company's creditors at the second meeting of creditors. 30 There is also the important public policy imperative in regularising the Company's status and Mr Frisken's conduct because of the effect that such conduct has had on third parties. It is submitted, and I accept, that the most significant impact on third parties is that Mr Frisken exercised the statutory power of an administrator to disclaim the Company's liability under a commercial lease. 31 I am satisfied that many of the considerations usually taken into account in exercising the discretion to make orders under s 447A to regularise an administrator's appointment weigh in favour of the orders sought in the present case:see the considerations listed at 23, (c), (e), (f), (g), (j), (k) and (l) extracted from Hayes at [279]. 32 While I accept that a Court should hesitate to exercise the power under s 447A to overcome a failure to comply with a statutory requirement for a valid appointment of an administrator under Pt 5.3A, I have decided that I should exercise the power conferred under the section in the present case. In doing so, I am conscious of the reservation expressed by Hammerschlag J in Sule Arnautovic and John Kukulovski at [24], but in the circumstances of this case having regard to the position of the Company at the time of making the order and what is best for the Company in the future and considering all those who have an interest and may be affected by the granting of relief, I am satisfied that orders should be made pursuant to s 447A. 33 Accordingly, I will make orders substantially in the form sought by the plaintiffs. I certify that the preceding thirty-three (33) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Cheeseman.